Wirtschaftswunder

“May you live in interesting times” is an ancient Chinese curse : most events that you can read about in history books have meant hard times for the individuals involved. We live in interesting times now, paying the price for the (financial) follies of the last decade. Mindboggling amounts of money are shifted around, austerity proponents battle with stimulus proponents, and the prospects are bleak and uncertain.

Economics as a science has been (rightfully) pushed from the Olympus: the extreme belief in the power of mathematical modeling can now be identified as the expression of a minority complex in relation to Physics. ( see http://www.zerohedge.com/news/guest-post-pseudoscience-economics).

As good a time as any to reset our thinking about what we are calling “The Economy”.

For me it’s not some abstract concept to be revered and feared, we are “the economy”. Our efforts to create a better life for our dearest and nearest and for our descendants are the core . Everything we have created to support that effort is just that: support, a means to an end.

Once we discovered that more wealth is created by specialization and trade, things took off compared to people who stayed hunter-gatherers. Specialization meant we could afford to spend time on knowledge, on research and development that fueled innovations. We could collectively afford to invest in infrastructure that lifted our existence to new heights. (Try doing that on your own: you could own all of the earth but if you would be truly alone on this earth, you have a poor and hard life).

The price you pay for specialization is dependency on others. Who can nowadays make any of the objects you routinely use or eat at home, all by yourself? We rely on incredibly complex dependencies to lead our wealthy lives. More than that, we rely on people we have never seen and do not know, have never communicated with and have no basis to trust. No small feat, given the limitations and weaknesses of human nature. The seven sins are always lurking just around the corner.

The solution is what some call “Social Technology” as opposed to physical technology. Laws, the justice system, constitutions, money and banks, democracy, corporations with shareholders, labor contracts, regulators, ownership, intellectual property and so on. All designed to compensate for the limitations and weaknesses of human nature while reaping the benefits of specialization.

Social Technology has to adapt, has to be innovated as circumstances change. For instance as physical technology gives us new possibilities: just look at the disruptive effects of digitization and worldwide communication networks.

Unfortunately the “laws of human nature” (if any) are quite different from physical laws, making it very hard to predict outcomes. And the only tests we know of are in real life……

The bad news is that we have a propensity to stumble along, changing our social technology by trial and error (and costly they can be, the errors created by ideologies). The good news is that we are only limited by our will and imagination in what we can change.

Take for instance the deployment of Next Generation Networks, of FttH.

Some decades ago we decided that privatized (shareholder driven) organizations would do a better job at providing telecommunication services than state owned (politically driven) organizations. And that competition would drive innovation. There is absolutely merit in the idea, but the design flaw in this setup becomes visible now that we need serious investments in new wireline access networks.

The new shareholders inherited a built out access network with customers that already generated massive free cash flows from the subscriptions paid by us . They have become addicted to the payout of these cash flows: going on a diet for 5 to 10 years to finance the build out of a new access network, that is not what they want . And as shareholders do everything but “hold” shares nowadays, the brakes are on.

Competition is a great idea but a very expensive hobby if you are imagining duplicated physical access networks, as other utilities show. We do not duplicate electricity access, or gas or water or sewer pipes. All available evidence indicates that the same applies to new wireline buildouts: it is very hard to build out one new network, let alone duplicates.

So, if this “social technology” doesn’t work out as planned, is there a change imaginable (other than reverting back to state owned organizations) that would at least create the incentive to invest?

In my opinion there is. The amazing growth of the German economy out of the rubble of WWII (known as the “Wirtschaftswunder”) is a good case study. German entrepreneurs have told me that (next to massive debt restructuring) one very clever piece of fiscal regulation fueled investments in the newest technology.

They could put existing old capital equipment like production machines in their books (once) at the price for which you could buy the newest models. The depreciation of the (artificially high) book value was a part of the cost price of goods that were produced. This of course led to nice cash flows for the companies. The clever part was that this cash flow could not be used for a payout to shareholders (or only after punitive taxation), however it could be used for new investments in capital equipment. The result was that German enterpreneurs invested heavily in the newest equipment (which created the market for manufacturers etc.). The fiscal regulation was removed after it had done its job

Imagine the same type of regulation would be put in effect for telco’s. No more payouts from cashflows generated by (us , the subscribers on) the old infrastructure, until the country is covered by FttH. Cashflows would immediately be directed to new network buildouts. A simple ULL-regulation would open up the network for competition. Yes, the shareholders would complain for some time, but it would fuel the required investments and focus everybody on the new future where the growth is. A benefit for shareholders (our pension funds?) as well in the longer run.

It may be unimaginable now for this to happen, but hey, did we expect the current crisis and the extreme measures taken by governments? And a small “wirtschaftswunder” would be quite welcome in these difficult times.

About Herman

Herman Wagter writes on Dadamotive about facts and figures behind issues that interest him. His work as interim manager and consultant has involved him directly in the impact of hyperconnectivity and sustainability on society. As an independent agent and "mobile warrior" he has experienced the pro's and con's of how organizations and projects can be structured, and what the effects on the final result can be. In his opinion we are entering an era of profound change, driven by these fundamental forces. Following the trends, discovering the fun and debunking the half-truths is a passion he likes to share with others.